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  • Lord Copper

Disorderly? When?

I should begin this piece by saying that I have no inside information, no direct line to any of the parties, so my comments are based solely on generally available thoughts.

We know that the LME faces legal challenges to its actions back in March of this year, when it closed the nickel market and cancelled a clutch of previously transacted trades, in the face of a wildly fluctuating market price. We also know that one of the primary obligations of the Exchange is to maintain an orderly market; it’s not too difficult to portray the nickel market over those few days in March as disorderly, so what’s the problem? Market went wild, so the Exchange stepped in to control it, in the best way it could in the then current circumstances. That’s probably a reasonably attractive defence to the actions brought by some funds, who claim damage to their business because of the trade cancellations.

But is that really enough? The central thought that I have on this is that it’s not sufficient to look just at those few days in March; the origins of the problem date back further beyond that. This time last year, the world was already aware that Vladimir Putin had his Russian troops poised for an invasion of Ukraine, even though it was by no means clear that he would actually give the mobilization order. Production from Russia’s Norilsk Nickel producer is crucial to the success of the LME’s nickel contract; this has been the case in the past with deliveries into LME stock, but even regardless of grades produced, an interruption - or the threat of an interruption - to the supply of Russian nickel into the global market should have sounded alarm bells.

But those alarms were ignored. As indeed was the growing short position of a Chinese NPI producer. Now, the bulk of that position was not held directly on the LME, but off-market, with a number of banks. Not really a secret, though - or if it was, it was an open one; again, I surmise, but I should be very surprised if those directly involved in the nickel market were not aware that there was a big - and growing - short. I have commented before on the fact that amongst the three hundred plus the LME now employs, vanishingly few have direct metal trading experience……maybe that knowledge and those contacts were of value, after all. Because the means to avert the crisis were of course there; a consistent, incremental increase in initial margins would have established much earlier if the short actually had the money to play the game, rather than waiting until the God knows how many billions of margins required - and seemingly difficult to pay - hit the market in March. I would suggest that although the market only became overtly disorderly then, the origins of that disorder were visible around the turn of the year.

Nobody knew what would happen between Russia and Ukraine, but trading metals has always had a significant geo-political thread running through it, simply because of the disparate natures of the places where metals are produced and consumed. That seems to have been ignored, this time.

But as I say, I am only an outsider looking in these days; we’ll get to see what the clever people - and particularly the clever lawyers - make of this sorry tale in the fullness of time.


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